Mexico hopes tax on soda will refill lost oil revenue

MEXICO CITY -- Mexico is trying to make up for a projected shortfall in oil revenue by raising taxes on other quick-fix liquids: colas and carbonated drinks.

A proposal by the nation's new President Felipe Calderon would impose a 5% levy on soft drinks -- and an additional 15% on cigarettes -- to raise $1 billion next year. With Mexico's oil production falling and its economy slowing, Calderon's administration is scrambling to find additional sources of revenue. Calderon said last week that he would seek to impose the new taxes as part of his 2007 budget.

The proposal has raised the ire of Mexico's $10-billion soft drink industry. The sector has taken out full-page ads in national newspapers blasting the proposal as a job killer and a potential blow to Mexican consumers, who trail only Americans in their consumption of carbonated drinks.

"Taxes on beer, cigarettes and soft drinks are the easiest to collect," said Alfredo Paredes, chief executive of Ajegroup, the maker of a popular soda called Big Cola. "That is why they are targeting us."

Although the tax would be levied on bottlers, companies said they would have to pass the cost on to the public, which already pays a 15% value-added tax on soda. They said the new tax could cost Mexico 36,500 jobs, including sugar-cane harvesters and mom-and-pop vendors.

Manufacturers said the hike would be particularly hard on low-income Mexicans, who spend more of their incomes on soft drinks than on beans. The average Mexican drinks an eye-popping 152 liters of soda a year, according to the industry statistics.

Sugary cola is a dietary staple for Mexico's poor. Cash-strapped laborers guzzle it on the job. Two-liter beverage bottles are more common than lunch boxes on construction sites.

"Poor people drink it for energy to keep from falling down in the street," said Paredes, whose Big Cola has captured nearly one-tenth of the Mexican market by selling cheaper than market leaders Coke and Pepsi.

At a convenience store in the capital's Polanco neighborhood, a 3.3-liter bottle of Big Cola was selling for $1.11 on Monday compared with $1.57 for a 2-liter bottle of Coke.

Paredes and other business leaders want Calderon to boost tax receipts by getting more cheats to pay up, rather than tapping industries that are already contributing.

The nation's underground economy is enormous and growing by the day. Millions of workers toil in off-the-books jobs as day laborers and street vendors. There's a popular saying among wealthy Mexicans: "If you're paying taxes, you have the wrong accountant."

Calderon has talked of simplifying the tax code and toughening enforcement to get more people to pony up. His move to hike taxes on soft drinks is an acknowledgment that Mexico's fiscal position is quickly deteriorating, thanks to heavy dependence on another prized liquid: petroleum.

Mexico, the world's No. 5 producer of oil, depends on it to fund 40% of its federal budget. Officials last year siphoned $54 billion from the state petroleum monopoly Pemex to finance public spending. High oil prices have resulted in tax windfalls over the last couple years but economists warn of a pending shortfall.

The nation's major oil field, Cantarell, is declining rapidly because of age. Production is down nearly 15% through the first 10 months of the year -- more than twice the rate of decline predicted by Pemex officials last year. The company's worst-case projections show production plummeting to about 520,000 barrels a day by the end of 2008 -- a nearly 70% freefall from October's average output of 1.65 million barrels a day.

Calderon's predecessor Vicente Fox tried to lessen Mexico's dependence on oil revenue by expanding Mexico's value-added tax, which functions like a national sales tax, to food and medicine. That proposal was rejected by Congress and got Fox branded an enemy of the poor.

Some analysts say Calderon's narrower tax on cigarettes and soft drinks stands a better chance of passage. Congress will probably decide on the measure before officials break for Christmas vacation.

Paredes said the industry was lobbying legislators, but he said he feared that they would rally around the new president to show support.

Mexicans are experiencing skyrocketing levels of obesity, heart disease, high-blood pressure and diabetes, largely because of unhealthful diets and lack of exercise. Increased taxes on Cokes and smokes could be used to offset soaring medical costs to treat these maladies.

Still, some aren't comfortable with the government using tax policy to influence fitness. Mexico City-based political analyst Sergio Sarmiento said consumers, not politicians, should decide what is healthful for them.

But at least one soda drinker agrees with Calderon. Lugging a 2-liter bottle of Sprite to his job site in the capital, construction worker Daniel Garcia said the tax hike would motivate him to spend his money on other things.

"It makes you fat and it messes up your blood," Garcia said of sugary drinks. "At first people will whine. We always do, especially with [anything to do with] money. But down the road it will be good for us."